Tribune breakup? Investors wonder...

Low stock price creates pressure to boost performance or be considered potential prey

As the mergers and acquisitions market heats up, Tribune Co., which has long fancied itself a buyer, more resembles a target.

The media conglomerate trades at about two-thirds its breakup value and at a discount to many big-media peers.

In a statement, Tribune Chairman, President and CEO Dennis J. FitzSimons says: "Tribune has been an independent company for more than 150 years. Our primary concern is serving our communities and creating value for our shareholders. We have an excellent mix of businesses and believe that Tribune has a strong future as an independent company."

To be sure, there isn't even a hint of takeover interest in the market. And regulatory issues and big controlling shareholders could thwart a suitor. But the low stock price puts pressure on Mr. FitzSimons to improve performance or be considered potential prey.

"There's always a chance in a consolidating industry," says John Miller of Ariel Capital, which owns more than 7 million shares, or 2.2%, of Chicago-based Tribune, a stake valued at $284 million. Chicago-based Ariel is one of at least three investors to buy at least 2 million shares since summer, as the stock price slumped amid an uneven advertising environment. "It's cheap, and you've got a lot of high-quality properties," says Mr. Miller. "My valuation (in a breakup) is right around $62," or $19.7 billion, more than 50% above Friday's close of $40.60.

RUNNING THE NUMBERS

Mr. Miller's estimate figures Tribune could get 12 times earnings before interest, taxes, depreciation and amortization, or EBITDA, for its newspapers and 14 times EBITDA for its television stations.

Newspaper groups in recent years have sold at 11 to 14 times EBITDA. At the 13 times multiple that Lee Enterprises Inc. last week agreed to pay for St. Louis Post-Dispatch parent Pulitzer Inc., Tribune's papers would be valued at $11.76 billion, or $37.14 per share, based on 2004 EBITDA of $905.2 million.

Television stations can fetch 12 to 15 times EBITDA. Some large-market stations such as Tribune's have fetched more. In 2002, Viacom Inc. paid 32 times EBITDA for Los Angeles' KCAL-TV, a lower-rated station than KTLA-TV, the Tribune-owned station in the market. That same year, Fox parent News Corp. spent 15 times EBITDA on Chicago's WPWR-TV, which lags Tribune's WGN in ratings.

At 13.5 times EBITDA, Tribune's television and entertainment division is valued at about $8.05 billion, or $25.50 a share, based on 2004 EBITDA of $596.7 million.

Subtracting Tribune's $2.5 billion debt, and adding roughly $1.3 billion in cash, myriad investments and ownership stakes -- including the Chicago Cubs and a 22% stake in the WB Television Network -- puts Tribune's breakup value at $58.86 per share.

"It's trading at a significant discount," says Henry Berghoef, director of research for Chicago-based Harris Associates' Oakmark Select Fund, which bought more than 2 million Tribune shares during the last nine months. "These properties should add up to a lot more than ($40 a share)."

Analysts have long speculated that Time Warner Inc., the largest U.S. media conglomerate, would like to own Tribune's broadcast stations in order to merge its WB Network with the largest station group carrying it, essentially creating a true network. Time Warner could either enter the newspaper business or sell the papers to a publisher such as New York Times Co., Washington Post Co. or McClatchy Co., all of which feature stocks trading at a premium to Tribune's. These companies declined to comment.

Any Tribune sale would likely require the blessings of the McCormick and Chandler trusts, which together control a 23% stake.

'A LONG SHOT'

In the meantime, however, Tribune remains a cheaply priced operator of trophy-quality assets at a time merger activity is surging.